Russian Majority Control is the End Game for Putin

Relevance:  BP is very likely to have its Kovykta gas field license revoked by Russian authorities in a move reminiscent of similar action taken against Shell in their Sakhalin project. Such action will be a prelude to majority control by Gazprom. International Oil Companies (IOCs) like nothing more than predictable political and fiscal conditions when they are making their investment decisions. Events in Russia have been anything but predictable during the Putin years and this must have left many oil execs wondering whether the political scene in Russia was a risk too far. However, we are now able to see a pattern emerging in Putin’s actions and it’s now becoming clear that Russian state owned entities must have majority control of gas projects with IOCs and other private investors welcome, but with a minority share. Outsiders may have operatorship of projects (as Shell has continued to do with Sakhalin), but it’s clear that Putin puts a low price on outside capital and know how.

AnalysisStable investment rules and their enforcement are right at the top of investors needs when entering petroleum provinces. The constantly changing scene in Russia, most graphically and emphatically illustrated by the state dismantling of Yukos, has made outside investors nervous about doing business there.

Ironically, the near certain action to be taken by Russia against TNK-BP’s interest in the Kovykta field (final confirmation of which has been delayed by several weeks to avoid confrontation at the upcoming G8 meeting) may be a sign that the business environment is becoming more stable, rather than less. It is now becoming clearer how Putin sees foreign participation in Russia’s gas, and therefore investors have a better idea of the new rules of the game for the upcoming years.

The new rules will be:

  1. Foreign participation will be welcome, and property rights respected, at less than 50% ownership on a project by project basis. Foreign companies will be required to sell down to less than 50% in existing projects.
  2. Any resistance by foreign owned companies to condition 1. above will be met with government interventions (under the guise of environmental or any other regulatory pretext). A fair price will be paid for assets that are transferred to state owned entities (Shell received a 25% premium for its interest in Sakhalin that was transferred to Gazprom).
  3. IOCs are welcome to seek access to resources elsewhere if they do not like these new conditions – Russia believes it holds upper hand in any such negotiation.
  4. Control over pace of development, product destination and other critical project issues will be very tightly controlled by Moscow.

Of course, many uncertainties still exist. Chief amongst these are the state’s intentions for billionaire private owners of assets; the application of these new rules to smaller projects; the ability of Putin to enforce the rules uniformly; and creeping intervention that results in 100% state control.

Nevertheless, IOCs are unlikely to be able to resist investing in the world’s largest resource holder that allows them access.

5 June 2007

 

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